Should I buy life insurance before or after I pay off my debts?

In an ideal world, the answer would always be "Right now. Stop reading this blog post, buy it, and come back." But that’s not always how things work. You might not need life insurance, or you might not be able to afford it.
Or you think you’re not able to afford it.

We’ve talked before about how the cost of term life insurance is overestimated by a lot of people. Other people might think that life insurance conflicts with their other financial priorities. That’s why this tweet to finance guru Dave Ramsey caught our attention:

@DaveRamsey We have 4 kids and currently on baby step 2, should I get term life insurance now or wait until we're debt free?

Why you might want to wait to buy life insurance

Debt can be crippling. American student loan debt totals $1.3 trillion. The average credit card debt is $5,700.Add that on top of your mortgage, and car loans, your everyday expenses...it adds up.

The "baby step 2" referred to in the tweet is part of Dave Ramsey’s 7 Baby Steps philosophy, the second of which is to pay off all debts (except for your house). That’s obviously an admirable goal. The last thing you want to do when you’re in debt is add another expense. So you’ll pay off any debts you have, then add life insurance to your budget. Simple, right? Actually, not quite.

Life insurance is a different kind of purchase than, say, a new car. Part of the point is that insures your loved ones from your debt. In fact, your debt is a reason to buy life insurance now.

Why you should buy life insurance while you still have debt

You should buy life insurance because you have that debt. Putting it off makes that debt even more dangerous to your family than it is now, and can put even more financial hardship on your loved ones in the future.

Life insurance protects your family from that debt

You might think of your debt as, well, yours, and that may be the case now. You want to a four-year university, you racked up student loan bills, and you make your payments every month.
But if you die, who is in charge of that debt?

That depends. If your debt is co-signed, your co-signer is on the hook. Student loans? Your parents probably co-signed. Mortgage? Maybe your partner’s name is also on it.

It’s hard enough to deal with debt. But if you’re the primary breadwinner, imagine how much harder it’s going to be for your family to pay off debt without your income around.

A 30-year, million-dollar term life insurance policy costs around $70 a month for a healthy 35-year-old man. For most people, that’s more than enough to cover your debt. Think about how much you pay each month for all of your debts combined. Seventy dollars is probably a fraction of it, and you may only need half of that, or a quarter, to make sure your family doesn’t inherit your debt.

Contrary to first impressions, life insurance shouldn’t be put off until you pay off your debt; it’s even more important to have while you have that debt.

Putting it off increases your rates

Another reason to buy term life insurance sooner rather than later? You’re just making it more expensive for future you.

Budget for life insurance

Before you apply for life insurance, you should calculate your life insurance need by adding up all of your assets, your future plans (like retirement), and, yes, your debt, and make sure the coverage amount and term length is enough to cover everything.

Then, compare policies. You don’t want to overpay for your policy, and comparing plans can ensure that you’re getting the best deal.

Once you find a policy that works for you, make it work with your budget. That might mean cutting back on discretionary spending or tightening your belt in other ways. A budgeting app like You Need A Budget can help you keep your spending in check.

Pay off your debt

Buying life insurance to protect against debt isn’t enough. You also have to actually pay off your debt.

Paying off debt can be overwhelming. It’s easier when you have a budget in place. Having a system in place, like the snowball method, also helps. The snowball method involves choosing your highest or lowest debt, putting everything you have into that debt while paying the minimums on your other debts, and, when you’ve paid off that debt, you move onto the next highest or lowest debt, and so on.

Reevaluate your life insurance need

So you bought term life insurance to protect your family from debt...and then you paid off that debt...so aren’t you now paying for too much life insurance?

It seems like a catch-22, but you can avoid this issue with the ladder strategy.
The ladder strategy works by staggering the term length and coverage amount of several policies, rather than buying a single policy. So instead of buying a 30-year/$1,000,000 policy, you buy three policies, one of which expires every 10 years, for amounts totaling $1,000,000.

This has two benefits. First, because you’re buying smaller, shorter policies, you pay less, and can save up to half of what you’d pay for a single large policy. Second, you’re stepping down your coverage over the years, so as you pay off your debt, you’re reducing the life insurance coverage you have – and no longer need.

Having debt isn’t fun. Leaving your debt to your family, with no way to pay for it, is even less fun. If you have dependents, life insurance shouldn’t be put off, and having debt should spur you to look into it even sooner. Need help finding out what life insurance policy is right for you? Ask one of our licensed insurance agents today, whether you’re debt-free or not.

Colin Lalley writes for Policygenius, a digital insurance brokerage trying to make sense of insurance for consumers.

Yes, we have to include some legalese down here. Read it larger on our legal page. Policygenius Inc. (“Policygenius”) is a licensed independent insurance broker. Policygenius does not underwrite any insurance policy described on this website. The information provided on this site has been developed by Policygenius for general informational and educational purposes. We do our best efforts to ensure that this information is up-to-date and accurate. Any insurance policy premium quotes or ranges displayed are non-binding. The final insurance policy premium for any policy is determined by the underwriting insurance company following application. Savings are estimated by comparing the highest and lowest price for a shopper in a given health class. For example: for a 30-year old non-smoker male in South Carolina with excellent health and a preferred plus health class, comparing quotes for a $500,000, 20-year term life policy, the price difference between the lowest and highest quotes is 60%. For that same shopper in New York, the price difference is 40%. Rates are subject to change and are valid as of 2/17/17.